Shorts Are Piling Onto These 3 Companies

by Tom Taulli | July 17, 2012 8:30 am

The second-quarter earnings season is rife with trepidation. Companies like Cummins (NYSE:CMI[1]), Infosys (NASDAQ:INFY[2]) and Advanced Micro Devices (NYSE:AMD[3]) already have indicated that expectations need to be ratcheted down — and investors have not been charitable, sending these companies to some big-time losses.

Of course, this could be an opportunity for short sellers to snag some profits. To get an idea, you can take a look at the “short interest,” which is the number of shares that currently are short on a stock. When it gets to more than 10% of the float, it usually is a sign that investors are skeptical about a company.

So what are some of the heavily shorted stocks ahead of earnings this week? Let’s take a look at three that stand out:

Safeway

Short Interest: 23% of the float

SuperValu (NYSE:SVU[4]) lost nearly half its value last Thursday amid horrid earnings, the axing of its dividend and the announcement that it is looking at “strategic alternatives” (that is, it wants to find a buyer).

SuperValu might not be an isolated case[5]. Because of the persistently low growth in the U.S. economy, consumers are looking for cheaper shopping alternatives. When it comes to groceries, one increasingly popular option is the dollar store. Consider that operators like Dollar Tree (NASDAQ:DLTR[6]), Dollar General (NYSE:DG[7]) and Family Dollar Stores (NYSE:FDO[8]) have done extremely well as of late. Thus, other grocery companies like Safeway (NYSE:SWY[9]) could be vulnerable to losing market share.

Shares already are off about 23% in 2012, but according to the shorts, things could get even worse. With the economy slipping — and rivals continuing to be a problem — it could be tough to beat the consensus for the second quarter, as analysts expect a 19.5% increase in earnings.

Greenhill & Co.

Short Interest: 21% of the float

Greenhill & Co. (NYSE:GHL[10]) is an investment bank that provides advisory services for mergers & acquisitions, restructurings and capital raises. The firm is one of the best on Wall Street and consistently snags top-notch clients.

The problem? Well, activity in corporate transactions has been fairly lackluster in 2012. With so much uncertainty about the global economy, CEOs are holding off on making transactions. This likely means lower fee levels for Greenhill.

And the stock isn’t cheap. Even after a drop from its February highs, GHL still sports a price-to-earnings ratio of 18 — a high price to pay for a company that might not see growth until next year.

Monro Muffler Brake

Short Interest: 18% of the float

Shares of Monro Muffler Brake (NASDAQ:MNRO[11]), a provider of auto repairs, are down close to 7% for the year. Short sellers think more downside is a-comin’.

Keep in mind that the summer season usually is slow, and the season’s woes likely will be exacerbated by the lagging economy. Just last week, O’Reilly Automotive (NASDAQ:ORLY[12]) cut its guidance because of weakness in June. ORLY’s second-quarter estimate for same-store sales is at 2% to 2.5%, down from a prior forecast of 3% to 5%. That’s certainly a big drop-off, and is an ominous sign for other auto stocks — like Monro.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to [13]IPO[14]. Follow him on Twitter at@ttaulli[15] or reach him via email[16]. As of this writing, he did not own a position in any of the aforementioned securities.